No comfort for hedgies

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The news that federal investigators had been gathering evidence of potentially improper trading against one of the founders of Loch Capital Management since early 2009 should make some hedge fund managers nervous–especially ones whose funds were big users of expert network firms like Primary Global Research.

Ever since the FBI raided three hedge funds last November, people in the hedge industry have been grumbling that the high-profile raids–which ultimately forced Loch and Level Global Investors to shut down–may have been an indication that U.S. authorities rushed to judgment. That’s especially since no one at Loch, Level Global or Diamondback Capital has been charged with any improper trading based on stock tips gleaned from a consultant with an expert network firm.

As I reported, a court filing shows that some 18 months before the FBI raided Loch, Diamondback and Level Global, authorities already had some evidence from an informant that Loch co-founder Todd McSweeney may have gotten “inside information” from Primary Global information. So far, neither McSweeney nor his twin brother Tim, the fund’s other co-founder, has been charged with any wrongdoing.

The fact U.S. prosecutors haven’t filed charges against anyone at Loch could be an indication of the weakness of the evidence. Or it could be an indication that insider trading cases take time and prosecutors don’t move until they are ready. Another complicating factor is that investigators have a mountain of evidence–tapes, emails, instant messages and trading records–to comb through. And that’s a process still going on.

Maybe no one from Loch, Diamondback, Level Global or any other hedge fund that has received subpoenas in the expert network phase of the investigation will get charged. But it’s too soon for hedge fund managers to sound the all clear to their investors.

After all, federal authorities were investigating Galleon co-founder Raj Rajaratnam for at least two years before they arrested him in November 2009 and we know how that case turned out.